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Postby mayankmundhra30 » Mon Aug 22, 2016 10:06 am

1) Simon invests in a three year corporate bond at a par value of $100 paying coupon of 4% semi-annually. He wants to assess value of his investment after one year using following spot rates. What is the value of his investment post one year?

Choose one answer.
a. 101.30 Incorrect
b. 100 Incorrect
c. 102.10 Correct
d. 102.40 Incorrect
The correct answer is C
[$2*e^(-0.025/2*1)]+[$2*e^(-0.026/2*2)]+[$2*e^(-0.027/2*3)]+[$2*e^(-0.029/2*4)]. This is discounting coupon and principle flows of the bond using spot rate for corresponding maturities
Why There is a 2 in the denominator. The question has a table. i am unable to copy. The question is from FMP New Quiz part-2. The question number is 10.i think there is no need to divide rate by 2 as spot rate are given for 0.5 year, 1 year, 1.5 years respectively.
Please reply at the earliest.

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Postby edupristine » Wed Sep 14, 2016 6:28 am

Hi Mayank

In this Question coupon value is semi annualy.

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